Investing in Emerging Markets - Emerging Market Bond Fund List - Emerging Market Assets Flow

Investing in emerging markets is a risky proposition. It has been one of the hallmarks of many of the great investors such as Templeton and Goldsmith. . Investing in emerging markets is inherently risky. You can invest directly in emerging market assets or in different emerging market funds.

Emerging market investments are diverse. Options include a global emerging markets fund or BRIC emerging markets fund for example. Investing emerging markets could mean investing in an emerging market bond fund, an emerging market equity fund or an emerging market mutual fund. There are many ways to invest in emerging fund assets.

Investing emerging markets means understanding risk and opportunity. Risk since the GFC of 2008 and the EU and US economic crisis of 2011 has become elevated. During financial market turmoil investors panic to sell emerging market assets. We have seen the European debt crisis extend to the periphery. Chaos and instability unnerves investing emerging markets. We have seen Greece riots, 1000 point Dow drop, protests in Romania and deadly riots in Thailand. Timing is critical when choosing investing emerging markets be it through an emerging market bond fund or other emerging market assets.

EPFR Global data showed the following outflows of $2.1 billion included.

• Latin America Equity Funds redemptions are at an 85-week high.  EMEA Equity Funds had net outflows of $350 million 
• Asia ex-Japan Equity Funds had their worst week in over 12 months.
• BRIC countries (Brazil, Russia, India and China) Equity funds had the largest outflows since October 2008 with $133 million redeemed. 

Africa equity funds continued to receive inflows for the 36th consecutive week. This is likely a reflection of commodity diversion. Year-to-date inflows to Africa equity funds are $400 million.

One would expect this trend to sell emerging market assets to continue after the trillion-dollar European rescue package has failed to comfort markets at weekend. We saw the Euro being punished at weeks end to a 1.2300 handle against the greenback and Oil now off $17 in less than a fortnight. These EPFR numbers don’t reflect the escalating violence in Thailand, South East Asia’s second biggest economy and moves seen in Romania and other countries.

The two countries currencies that have benefited the most from emerging market inflows in Europe have been Hungary and Poland because of the carry trade. However this has reversed, the Polish zloty has fallen 1.5 percent against the euro from Friday's open, the euro traded at 4.0030 zlotys. The Hungarian forint fell 0.8 percent and the Czech koruna fell 0.3 percent. The US dollar broke the key EURUSD $1.25 level precipitating stop losses. Other notable emerging market currencies were hit with the Turkish lira falling 0.7 percent and the South African while rand falling 0.2 percent.

Amongst the emerging Europe markets Bucharest stocks were the worst hit, falling about around 2 percent. Stock markets in Warsaw, Moscow, Prague and Budapest fell around one percent Earlier in Asia, Indian and Chinese markets closed half a percent lower. US stock markets went on to be savaged after Europe closed. Despite promising industrial production, retail sales and confidence numbers U.S. markets remain fearful of the huge European sovereign debt burdens and the handbrake affect it may have on growth. The U.S. Standard & Poor's 500 index ended down 1.88 percent at 1,135.68, after being down over 2 percent.

It is often worth while looking at worse case scenarios when determining risk. Keep an eye on information sites like EPFR Global data. EPFR publishes data each week to track investor movements. These movements which are helpful in gaging the emotive actions of the investment herd.

In times of fear the data shows that global investors sell emerging market assets and equities and keep the proceeds in cash. Lets take May 2010 as an excellent example when we had panic in Europe, America, Thailand and South America.

Money market fund assets gained $23.5 billion in the week to May 12. Significantly these were the first net inflows in money market funds since January. The riskier emerging market stock funds showed outflows of $2.1 billion as investors rush to sell emerging market assets. 

The EPFR highlighted that the risk aversion isn’t just stocks and bonds but emerging market specific. Emerging bond funds inflows slowed to only $22 million last week. Putting this perspective, the average weekly inflow for emerging bond flows was $1 billion during the past month.

In a reflection of safe haven buying of U.S. Treasury bonds sovereign emerging nation yield spreads jumped 7 basis points over U.S. Treasuries to 285 bps.

We have seen many emerging market bond sales delayed or cancelled since the Greece Sovereign debt meltdown. This is anecdotal evidence of what investors are concerned about and have rushed to safe haven assets.

Emerging bond sales delayed.

• Argentina's first bond since its 2001 default
• Albania’s debut bond

Emerging bond raisings

There has been some emerging bond raising going ahead with the recipients prepared to pay the heavier yields.

• Kazatomprom, the Kazakh state-run uranium firm, raised $500 million at a 6.5 percent yield, this was actually at a better yield than expected because of the strong credit rating assigned to the company. The books on the issue were over $4 billion. The issue was a 50 bps a premium to KMG's bonds.
• Metinvest, the Ukrainian steelmaker has a five-year dollar bond on offer, the initial guidance at 10.5 percent.

Future Asset Allocation

As investors’ rush to sell emerging market assets once the fear in world markets subsides there may be a shift back to emerging markets for diversification opportunities. RBS corporate bond strategist Okan Akin was quoted as saying ''Volatility in world markets may cause some more asset allocation to emerging markets and that may help EM corporates’ As a caveat 'The key issue is supply. There is big pent up supply as companies did not have access to funding in most of 2009.'

At this point in time this is a reflection of the riskiest of assets, if the contagion is not curtailed then the flight to safe havens will continue. This will have the self-fulfilling prophesy of choking off growth as there will be no capital to keep the wheels spinning.